Suppose that the U.S. dollar depreciates nominally against the Mexican peso by 5%. The price level in the United States increases by 7%, but Mexico's price level does not change. From this we can conclude that:

Question

Quizplus · Accepted Answer

A nominal depreciation of the U.S. dollar means that it now takes more dollars to buy the same amount of pesos. Since the Mexican price level has not changed, the relative price of U.S. goods compared to Mexican goods has become more expensive. This means that U.S. goods are more expensive for Mexicans to buy, and Mexican goods are cheaper for Americans to buy, making U.S. goods relatively less competitive in international markets. The real exchange rate can be calculated by adjusting the nominal exchange rate for the difference in inflation rates between the two countries. In this case, the U.S. dollar has experienced a real depreciation because the increase in the U.S. price level is greater than the increase in the Mexican price level.

Suppose That the U